Special Reports representatives of the German states'tax authorities. possibility also existed prior to the draft ordinance the The document was prepared by a working group, explicit statement in the draft ordinance certainly will which met regularly in Berlin and received input from lead to an increased demand from tax auditors for representatives of German industry. The tax authori- those documents. Therefore, taxpayers are well ties requested comments on the document within four advised when formulating those minutes to take into weeks from the publishing date. It can be expected that account that their content might be reviewed by the after reviewing those comments the final document tax auditor will be published at the beginning of 2005 B. Use of Secret Comparables Il Obligations of the Tax Authorities The draft ordinance allows tax auditors to use secret comparables, which can be found in the tax files of the Unlike other announcements of the tax authorities, authorities for other taxpayers. 12 This is in line with the draft ordinance emphasizes that tax authorities have the jurisdiction of the Supreme Tax Court of October an obligation to investigate and try to discover facts that 17, 2001, in which the court also permitted the use of are beneficial for the taxpayer: The draft ordinance also those secret comparables. However, the draft orrectly states that a correct transfer price usually does ordinance emphasizes that these data cannot be not exist and that the taxpayer has no obligation under disclosed to the taxpayer, the tax court, and the other German law to prove the correctness of the chosen price. tax authority in a competent authority or arbitration This last clarification is particularly important because it procedure. In spite of those disclosure restrictions, the had been asserted in German tax literature that the draft ordinance then requires that the taxpayer be Documentation Law, under which the taxpayer is given the opportunity to comment on the comparable required to prepare documentation on the appropriate data and the comparability of that data. This is, of ness of the transfer price, would lead to a change of the course, almost impossible for the taxpayer if the burden of proof. This is technically not correct, although necessary information is not disclosed to him a832938 the taxpayer should prepare documentation about the Therefore, the evidence value of secret comparables is appropriateness of the chosen price. That documenta- largely decreased. This is acknowledged in the draft tion, however, will usually lead to the identification of a ordinance. Therefore, it can be expected that the range of prices or results that could be arms length Of relevance of secret comparables will be minimal in ourse, then the tax authorities can establish a different practice. range, and, in case of doubt, the taxpayer does not have to prove the correctness of the chosen price setting. Instead, C Criminal Proceedings the tax authorities have the burden of proof that the One rather disturbing aspect of the new draft osen price is not at arms length. ordinance is that the tax authorities mention several A Preparation of an Audit evasion in connection with the determination and The new draft ordinance encourages the tax author- documentation of transfer prices. It can only be hoped ities to organize and plan the tax audit before the start that in practice the tax auditors will apply those provi- of the investigation on the premises of the taxpayer. 10 sions very carefully. As already stated by the OeCD, To achieve this, the draft ordinance suggests that setting transfer prices is not an exact science 16 and certain documents and papers be obtained prior to the requires considerable judgment. Therefore, criminal start of the audit. among other documents, the draft proceedings for setting transfer prices should be ordinance also states that the auditor might request limited to very extreme cases minutes from supervisory board meetings, board meetings, and shareholder meetings. 1 Although this Wassermeyer/Baumhoff, AuBensteuerrecht, section 1 AStG, note 823.1 See in particular, Heinz-Klaus Kroppen and Stephan Ras BFD, International Transfer Pricing Journal, 2004, P. 222 Heinz-Klaus Kroppen and Stephan Rasch, Internationa 12Note 2.6 of the draft ordinance haftsbriefe, Fach 3 Deutschland, Gruppe 1, p. 2057; Axel Eigelshoven and Stephan Rasch, 13 Transfer Pricing Report 114 June9,2004. 10Note 2.2 of the draft ordinance Heinz. 11See, e.g., decision of the tax court of Munster, dated Aug 22, Internat. 000, 6K 2712/00, Entscheidungen der Finanzgerichte 20 pp. 1787, 1789, and note 3.30 of the OECD Guidelines ff. ; see also Rasch, in Becker/Kroppen (eds ) Ho Internationale verrechnungspreise(Koln: Dr. Otto Verlag. 1999),0 number 5.2, note 4. CNote 1.46 of the OECD guidelinesrepresentatives of the German states’ tax authorities. The document was prepared by a working group, which met regularly in Berlin and received input from representatives of German industry. The tax authori￾ties requested comments on the document within four weeks from the publishing date. It can be expected that after reviewing those comments the final document will be published at the beginning of 2005. II. Obligations of the Tax Authorities Unlike other announcements of the tax authorities, the draft ordinance emphasizes that tax authorities have an obligation to investigate and try to discover facts that are beneficial for the taxpayer. The draft ordinance also correctly states that a correct transfer price usually does not exist and that the taxpayer has no obligation under German law to prove the correctness of the chosen price. This last clarification is particularly important because it had been asserted in German tax literature8 that the Documentation Law, under which the taxpayer is required to prepare documentation on the appropriate￾ness of the transfer price, would lead to a change of the burden of proof. This is technically not correct, although the taxpayer should prepare documentation about the appropriateness of the chosen price. That documenta￾tion, however, will usually lead to the identification of a range of prices or results that could be arm’s length. Of course, then the tax authorities can establish a different range,and,in case of doubt,the taxpayer does not have to prove the correctness of the chosen price setting.Instead, the tax authorities have the burden of proof that the chosen price is not at arm’s length.9 A. Preparation of an Audit The new draft ordinance encourages the tax author￾ities to organize and plan the tax audit before the start of the investigation on the premises of the taxpayer.10 To achieve this, the draft ordinance suggests that certain documents and papers be obtained prior to the start of the audit. Among other documents, the draft ordinance also states that the auditor might request minutes from supervisory board meetings, board meetings, and shareholder meetings.11 Although this possibility also existed prior to the draft ordinance, the explicit statement in the draft ordinance certainly will lead to an increased demand from tax auditors for those documents. Therefore, taxpayers are well advised when formulating those minutes to take into account that their content might be reviewed by the tax auditor. B. Use of Secret Comparables The draft ordinance allows tax auditors to use secret comparables, which can be found in the tax files of the authorities for other taxpayers.12 This is in line with the jurisdiction of the Supreme Tax Court of October 17, 2001,13 in which the court also permitted the use of those secret comparables. However, the draft ordinance emphasizes that these data cannot be disclosed to the taxpayer, the tax court, and the other tax authority in a competent authority or arbitration procedure. In spite of those disclosure restrictions, the draft ordinance then requires that the taxpayer be given the opportunity to comment on the comparable data and the comparability of that data. This is, of course, almost impossible for the taxpayer if the necessary information is not disclosed to him. Therefore, the evidence value of secret comparables is largely decreased.14 This is acknowledged in the draft ordinance. Therefore, it can be expected that the relevance of secret comparables will be minimal in practice. C. Criminal Proceedings One rather disturbing aspect of the new draft ordinance is that the tax authorities mention several times15 the possibility of criminal proceedings for tax evasion in connection with the determination and documentation of transfer prices. It can only be hoped that in practice the tax auditors will apply those provi￾sions very carefully. As already stated by the OECD, setting transfer prices is not an exact science16 and requires considerable judgment. Therefore, criminal proceedings for setting transfer prices should be limited to very extreme cases. 198 • January 10, 2005 Tax Notes International Special Reports 8For a discussion, cf. Franz Wassermeyer, in Flick/ Wassermeyer/Baumhoff, Außensteuerrecht, section 1 AStG, note 823.17. 9See in particular, Heinz-Klaus Kroppen and Stephan Rasch, IBFD, International Transfer Pricing Journal, 2004, p. 222; Heinz-Klaus Kroppen and Stephan Rasch, Internationale Wirtschaftsbriefe, Fach 3 Deutschland, Gruppe 1, p. 2057; Axel Eigelshoven and Stephan Rasch, 13 Transfer Pricing Report 114, June 9, 2004. 10Note 2.2 of the draft ordinance. 11See, e.g., decision of the tax court of Münster, dated Aug. 22, 2000, 6 K 2712/00, Entscheidungen der Finanzgerichte 2001, pp. 4 ff.; see also Rasch, in Becker/Kroppen (eds.) Handbuch Internationale Verrechnungspreise (Köln: Dr. Otto Schmidt Verlag, 1999), O number 5.2, note 4. 12Note 2.6 of the draft ordinance. 13See footnote 2. 14See Heinz-Klaus Kroppen, Stephan Rasch, and Achim Roeder, Tax Notes Int’l, Dec. 10, 2001, p. 1111, at 1112; Heinz-Klaus Kroppen, Stephan Rasch, and Achim Roeder, Internationale Wirtschaftsbriefe, Fach 3 Deutschland, Gruppe 1, pp. 1787, 1789, and note 3.30 of the OECD Guidelines. 15Note 2.7. and 3.2.6 of the draft ordinance. 16Note 1.46 of the OECD guidelines. (C) Tax Analysts 2005. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content